Most advisors would agree that a fixed annuity can be an integral part of a sustainable income plan in retirement. Yet selling fixed annuities come with myriad regulations.
Increasingly, to handle those risks, general agencies, field marking organizations and broker-dealers have instituted suitability measures in the interest of consumer protection and overall due diligence.
In a recent interview, Alex Holloman III, director of suitability at Athene Annuity & Life Assurance Company, right, shared his insights on annuity suitability best practices.
LHP: This term “suitability” is used a lot. In plain English, can you define it?
Alex Holloman: Broadly speaking, “suitability” describes the steps taken by an agent and an insurance company to reasonably ensure that the annuity being recommended appropriately addresses a client’s insurance needs and financial objectives at the time of the sale.
The process is based on the needs and financial information provided by the client and governed by standards and supervisory procedures developed by the insurance company. The client is an integral part of this process. Both the client and the agent must have a reasonable basis for believing the recommendation is suitable.
The 2010 Suitability in Annuity Transactions Model Regulation, which has been adopted by 27 states, sets standards and procedures for suitable annuity recommendations and requires insurers to establish a supervisory system. Other states have adopted previous or similar versions of this regulation.
Common concerns and red flags
LHP: Would you describe some common suitability concerns that a given insurer would be mindful of or tend to be viewed as red flags?
Holloman: The Model Regulation puts forth 12 points that all insurance companies are responsible for monitoring. Carriers are directed by the Model Regulation to obtain 12 specific types of suitability information. Generally this information falls into three categories:
- Financial profile and situation
- Financial resources
Red flags may include limited savings, lack of investment experience, and situations where the purchase would require a significant portion of a client’s assets.
Another potential red flag focuses on the source of funds in a particular circumstance surrounding the replacement of existing insurance or annuity contracts.
Replacements and portfolio reviews
LHP: Do consumers or trustees ever replace annuities to adapt to changing circumstances, preferences or financial market changes?
Holloman: Yes, consumers do replace annuities to fit their goals. Situations may arise where the product they purchased is not capable of meeting their future needs.
According to data from LIMRA, 25 percent of the policies issued involve the replacement of an existing contract. In replacement situations, companies may look at the following factors, among other items:
- Surrender charges
- Death/income benefits (liquidity)
- MVA (market-value adjustment)
- Replacements in the past 36 months
- Issue date of the contract being replaced
A carrier that decides to accept a replacement with one or more of these potential issues should review to ensure that there is a tangible net benefit from the transaction to the consumer.